Closing an entity in your private group
You may decide to close an entity in your private group or your entire business.
The disposal of assets, liquidation or vesting of entities may have tax consequences.
Effective tax governance when closing a business will help mitigate risk and provide practical certainty for stakeholders.
For more information, see Changing, selling or closing your business.
Companies
When a company is wound up, liquidated or deregistered, you should retain documentation for tax governance purposes. This may include:
- contracts for sale of assets
- documentation to evidence the forgiveness of loans
- minutes of meetings.
In some cases, you may be legally required to retain this information.
Example: winding up a company
Spin Records has been a profitable company for many years. However, due to a change in consumer demand and the economy, its company directors believe it is no longer viable to continue to carry on the business.
The directors decide to liquidate and deregister Spin Records before it becomes unprofitable, rather than dispose of the business. They agree to engage a liquidator to start winding up the company in 3 months. This allows it to fulfil its final contracts with customers.
Before commencing liquidation, a dividend is declared and paid to the shareholders. The assets of the company are then sold. The proceeds and cash reserves are used to pay creditors. Loans provided to shareholders are forgiven. A final dividend is declared by the liquidator and paid to shareholders before the company is deregistered with ASIC.
Spin Records needs to retain the following documentation for tax purposes:
- minutes of meetings documenting key decisions relating to the winding up, liquidation and deregistration
- minutes of directors' meetings relating to the dividends declared and paid
- minutes of meetings conducted by the liquidator
- analysis of the tax consequences of the sale of assets and the forgiveness of loans to related parties
- the final tax return and details of payment of tax liabilities.
The company’s shareholders also need to keep documentation to substantiate the cost base of shares in the company for capital gains tax purposes.
End of exampleTrust vesting
Where a trustee is intending to vest a trust, they should carefully examine the trust deed to ensure adherence to its terms.
The trustee should:
- Make written trust resolutions to record the trustee's decisions throughout the vesting process. This is particularly important where the trustee has the discretion to exclude the distribution of income or capital from the winding-up process to one or more beneficiaries, unit holders, or classes of unit holders.
- Document forgiving or assigning related entity loans receivable and payable, and determine the tax consequences of forgiving a loan.
- Examine the rights attached to each unit class, where the trust is a unit trust. This will determine which unit classes are eligible to receive distributions if the trust is being wound up.
- Record the decision made if the trust deed provides for the trustee to transfer assets to a beneficiary or unit holder to satisfy a distribution of income or capital where the trust is being wound up.
- Consider getting a market valuation of the asset. This will show that the asset being transferred does not exceed the amount to which the beneficiary or unit holder is presently entitled. A transfer of the asset could potentially result in a capital gains tax event to the trust. The trustee should consider the tax consequences.
- Notify beneficiaries and unit holders of their share of the income or capital of the trust so they can determine and report their tax obligations.
Partnerships
Where a partnership ends, a final partnership distribution will be necessary.
Each partner will need to retain documentation to substantiate the cost base of their respective interest in the partnership for capital gains tax purposes.